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FISCAL AND CREDIT
UNCERTAINTY LOOMS
FOR NEW JERSEY
LOCAL GOVERNMENTS

By Edward J. McManimon. III
League Associate Counsel

Historically, the state and its many local governments have had easy access to the financial markets for financing their capital needs with bonds and other debt obligations. This has largely been the natural product of the strong financial footing and regulatory oversight at the state level as well as the availability and preemptive use of state resources where and when necessary that justified relatively strong credit ratings across the board. That standing has begun to erode and is in jeopardy unless substantial and sustained financial reforms are undertaken at all levels of government. On top of that, the recent collapse of the short term note market, which had nothing to do with credit quality, signals a potential dramatic change to what had previously been routine access to funds to finance capital projects for municipalities and local governments.

As a result of: 1) the continuing increases in debt at all levels of government, 2) decreases in reserves, 3) increasing unfunded and underfunded public employee pensions, health care and other related benefits, 4) continuing and escalating increases in labor costs, 5) significant increased COAH obligations imposed on new development and other increasing regulatory controls that affect new development throughout the State, 6) limits on local budgets that complicate the solution to local financial problems, 7) movements of business and people to other states, and 8) other related natural changes resulting from the high density of the state, the credit rating agencies have begun to look with more scrutiny at the financial condition and credit worthiness on the state and its local governments than at any time in the past. New Jersey communities and the regulatory agencies that oversee the finances of such communities have been viewed for years as the leaders in the financial industry affecting local governments. The natural financial resources of its residents and the benefits of its location have made the financial fortunes of the state substantial and sustained. Changes to all of this are occurring and the implications can no longer be ignored. People are reluctant to discuss it, but it needs serious discussion now and serious solutions.

The state itself has experienced a gradual deterioration of its financial condition and its ability to be the first and last resort for solving local government financial problems is at best severely challenged with no real prospect for that to change in the near or long term. This has significant implications to a number of urban communities which have relied heavily on state aid to balance their budgets. It also, however, affects many other municipalities which annually receive smaller but significant State Aid under various programs. The state already dedicates over 1/3 of is $32 billion budget to municipal and school aid. So, it is difficult to assume for the future that under the circumstances it could increase or even keep such aid at current levels to reduce the local governments’ dependence on property taxes. The local governments will have to reduce their costs or be responsible for the continuing increase in property taxes.

Some have suggested that the solution to this dilemma is to immediately consider consolidating many of the 566 municipalities, the 600+ school districts and the 21 counties. Presumably then, the many local authorities and agencies or districts would correspondingly shrink as well. This certainly needs to be seriously considered because the costs of local government for administration, finance, police, fire, public works, social programs, pension, health care, and other benefits are considerable and rising every year as are the taxes that support these costs. But as that is considered it must be tempered with the reality that history has proven that bigger is not necessarily better or cheaper as the disproportionate cost for these services in the large urban and suburban areas is a stark indicator that such consolidation may not bring less cost for the those services and may prove to be significantly less efficient. Furthermore, many efforts to regionalize police and fire services among smaller communities have resulted in increased costs and at least the perception of less efficient service. New Jersey is a densely populated state. The demands and expectations for services will not disappear overnight with consolidation.

That said, consolidation is inevitable and perhaps even essential for the long term financial stability of all of our governments. But there are a multitude of substantive core issues that realistically require balancing the broad and legitimate social issues and costs with the very practical concerns within the context of the ever increasing income, sales, business and property tax structure in New Jersey. The state must be able to maintain services
and also to continue to attract and
maintain businesses that have provided the engine for growth and financial stability in our state. If businesses and people move elsewhere because of the inevitable spiral of taxes, services and costs of government, the financial footing of New Jersey could fall as rapidly as the financial markets fell recently. No one seems willing to face this possibility or to see the need to seriously address the potential collapse of our financial foundation with realistic assessments of the costs and impacts and consequence of inertia and status quo. These issues need serious debate and discussion before any consolidation is seriously pursued as if it were the solution. Some level of consolidation should be the end result, if appropriate, and not the starting point. Otherwise, it will mask the real problems and serve only to fuel false hope that real tax relief is possible.